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Executing Successful Joint Ventures (Part 1): Frequently Asked Questions

on Friday, 18 September 2015 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

This is the first installment in a four-part series on cross-border joint ventures. It is intended to provide an introduction to the common questions, concerns and opportunities presented by international partnerships.

Why choose a cross-border joint venture?

Businesses often use joint ventures to expand internationally to fill a gap in their business plans for a particular foreign market. Those gaps often include expertise in marketing, distribution and sales. Depending upon the industry, the legal right to pursue the activity or access government subsidies also may be an issue.

Extending your business into foreign markets also frequently involves new risks and opportunities. Having a local partner with an economic stake in your success is viewed as a means to better understand them. Well-constructed cross-border joint ventures incrementalize risk while you expand globally. They are a way to gain the necessary understanding of the market before investing more fully. In some cases, it may be more cost-effective to use an existing physical presence of a joint venture partner, rather than starting from scratch. In virtually all cases, cross-border joint venture partners offer language skills, cultural insights and knowledge of local customs.

What is the objective of negotiations with your cross-border joint venture partner?

Because you will be building a business with your joint venture partner, it is best to approach negotiations as a creative exercise wherein you determine compatibility and mutual objectives, and seek to create agreements that accommodate the interests of each party. In other words, the outcome of the negotiations should be a set of agreements that satisfy all parties to the negotiation. It may be that your host country partner has unique insight into the local market but needs the operational expertise of an experienced U.S. company. To fully understand your foreign partner’s objectives and priorities and to avoid undue misunderstanding, the key again is to incrementalize discussions. Begin by spending substantial time simply learning about your partner. Although there is some information that you will not want to disclose, such as alternatives you have as back-ups to a deal with the joint venture partner, disclosing the relative importance of issues creates trust and allows you and your prospective partner to identify opportunities to achieve the so-called “win-win” arrangement. Move forward to the next phase of discussion only after it is clear that you have a common understanding. Inevitably, each party will make concessions during the negotiation, but a party’s concessions should clearly be in exchange for something of greater value to that party.

How do you manage communication with your prospective partner?

Because there are often language and cultural barriers, it is important to be patient, clear and flexible during discussions. Communicate in a layered approach of in-person conversations, followed by written documents memorializing the progress of negotiations with your joint venture partner. Perhaps paradoxically, it also is important to keep the final legal documents relatively simple and flexible to adapt to the development of the relationship. Achieving this balance, while at the same time clearly expressing the understanding of the parties, requires a delicate touch.

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